XML 34 R22.htm IDEA: XBRL DOCUMENT
v3.23.3

Derivative Accounting | 9 Months Ended
--- | ---
Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Accounting | Derivative Accounting Derivative financial instruments are used to manage exposure to commodity price and transportation costs of electricity, natural gas, emissions allowances, and interest rates. Risks associated with market volatility are managed by utilizing various physical and financial derivative instruments, including futures, forwards, options, and swaps. As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity and natural gas. Derivative instruments that meet certain hedge accounting criteria may be designated as cash flow hedges and are used to limit our exposure to cash flow variability on forecasted transactions. The changes in market value of such instruments have a high correlation to price changes in the hedged transactions. Derivative instruments are also entered into for economic hedging purposes. While economic hedges may mitigate exposure to fluctuations in commodity prices, these instruments have not been designated as accounting hedges. Contracts that have the same terms (quantities, delivery points, and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power costs in our Condensed Consolidated Statements of Income, but does not impact our financial condition, net income, or cash flows. Our derivative instruments, excluding those qualifying for a scope exception, are recorded on the balance sheets as an asset or liability and are measured at fair value. See Note 11 for a discussion of fair value measurements. Derivative instruments may qualify for the normal purchases and normal sales scope exception if they require physical delivery, and the quantities represent those transacted in the normal course of business. Derivative instruments qualifying for the normal purchases and sales scope exception are accounted for under the accrual method of accounting and excluded from our derivative instrument discussion and disclosures below. Energy Derivatives For its regulated operations, APS defers for future rate treatment 100% of the unrealized gains and losses on derivatives pursuant to the PSA mechanism that would otherwise be recognized in income. Realized gains and losses on energy derivatives are deferred in accordance with the PSA to the extent the amounts are above or below the Base Fuel Rate. See Note 4. Gains and losses from energy derivatives in the following tables represent the amounts reflected in income before the effect of PSA deferrals. The following table shows the outstanding gross notional volume of energy derivatives, which represent both purchases and sales (does not reflect net position):
|  |  | Quantity
Commodity |  | Unit of Measure | September 30, 2023 |  | December 31, 2022
Power |  | GWh | 390 |  |  | 1,197 |
Gas |  | Billion cubic feet | 198 |  |  | 149 |
Gains and Losses from Energy Derivative Instruments For the three and nine months ended September 30, 2023 and 2022, APS had no energy derivative instruments in designated accounting hedging relationships. The following table provides information about gains and losses from energy derivative instruments not designated as accounting hedging instruments (dollars in thousands):
|  | Financial Statement Location |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
Commodity Contracts |  |  | 2023 |  | 2022 |  | 2023 |  | 2022
Net Gain (Loss) Recognized in Income |  | Fuel and purchased power (a) |  | $ | (32,096) |  |  | $ | 138,855 |  |  | $ | (271,171) |  |  | $ | 425,122 |
(a)Amounts are before the effect of PSA deferrals. Energy Derivative Instruments in the Condensed Consolidated Balance Sheets Our energy derivative transactions are typically executed under standardized or customized agreements, which include collateral requirements and, in the event of a default, would allow for the netting of positive and negative exposures associated with a single counterparty. Agreements that allow for the offsetting of positive and negative exposures associated with a single counterparty are considered master netting arrangements. Transactions with counterparties that have master netting arrangements are offset and reported net on the Condensed Consolidated Balance Sheets. Transactions that do not allow for offsetting of positive and negative positions are reported gross on the Condensed Consolidated Balance Sheets. We do not offset a counterparty’s current energy derivative contracts with the counterparty’s non-current energy derivative contracts, although our master netting arrangements would allow current and non-current positions to be offset in the event of a default. These types of transactions may include non-derivative instruments, derivatives qualifying for scope exceptions, trade receivables and trade payables arising from settled positions, and other forms of non-cash collateral (such as letters of credit). These types of transactions are excluded from the offsetting tables presented below. The following tables provide information about the fair value of our risk management activities reported on a gross basis, and the impacts of offsetting. These amounts relate to commodity contracts and are located in the assets and liabilities from risk management activities lines of APS’s Condensed Consolidated Balance Sheets.
As of September 30, 2023: (dollars in thousands) |  | Gross Recognized Derivatives (a) |  | Amounts Offset (b) |  | Net Recognized Derivatives |  | Other (c) |  | Amount Reported on Balance Sheets
Current assets |  | $ | 21,754 |  |  | $ | (10,383) |  |  | $ | 11,371 |  |  | $ | 5 |  |  | $ | 11,376 |
Investments and other assets |  | 6,695 |  |  | (3,524) |  |  | 3,171 |  |  | — |  |  | 3,171 |
Total assets |  | 28,449 |  |  | (13,907) |  |  | 14,542 |  |  | 5 |  |  | 14,547 |
Current liabilities |  | (46,044) |  |  | 10,383 |  |  | (35,661) |  |  | (7,071) |  |  | (42,732) |
Deferred credits and other |  | (16,536) |  |  | 3,524 |  |  | (13,012) |  |  | — |  |  | (13,012) |
Total liabilities |  | (62,580) |  |  | 13,907 |  |  | (48,673) |  |  | (7,071) |  |  | (55,744) |
Total |  | $ | (34,131) |  |  | $ | — |  |  | $ | (34,131) |  |  | $ | (7,066) |  |  | $ | (41,197) |
(a)All of our gross recognized derivative instruments were subject to master netting arrangements. (b)No cash collateral has been provided to counterparties, or received from counterparties, that is subject to offsetting. (c)Represents cash collateral and cash margin that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument. Includes cash collateral received from counterparties of $7,071 thousand and cash margin provided to counterparties of $5 thousand.
As of December 31, 2022: (dollars in thousands) |  | Gross Recognized Derivatives (a) |  | Amounts Offset (b) |  | Net Recognized Derivatives |  | Other (c) |  | Amount Reported on Balance Sheets
Current assets |  | $ | 103,484 |  |  | $ | (15,808) |  |  | $ | 87,676 |  |  | $ | 28 |  |  | $ | 87,704 |
Investments and other assets |  | 49,777 |  |  | (5,383) |  |  | 44,394 |  |  | — |  |  | 44,394 |
Total assets |  | 153,261 |  |  | (21,191) |  |  | 132,070 |  |  | 28 |  |  | 132,098 |
Current liabilities |  | (47,670) |  |  | 15,808 |  |  | (31,862) |  |  | (5,835) |  |  | (37,697) |
Deferred credits and other |  | (9,223) |  |  | 5,383 |  |  | (3,840) |  |  | — |  |  | (3,840) |
Total liabilities |  | (56,893) |  |  | 21,191 |  |  | (35,702) |  |  | (5,835) |  |  | (41,537) |
Total |  | $ | 96,368 |  |  | $ | — |  |  | $ | 96,368 |  |  | $ | (5,807) |  |  | $ | 90,561 |
(a)All of our gross recognized derivative instruments were subject to master netting arrangements. (b)No cash collateral has been provided to counterparties, or received from counterparties, that is subject to offsetting. (c)Represents cash collateral and cash margin that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument. Includes cash collateral received from counterparties of $5,835 thousand and cash margin provided to counterparties of $28 thousand. Interest Rate Derivatives On October 19, 2022, Bright Canyon Energy entered into an interest rate swap to hedge the variable interest rate exposure relating to the credit agreement for the Los Alamitos project. The transaction qualified and had been designated as a cash flow hedge. The interest rate swap was included in the BCE Sale and was transferred to Ameresco as part of the BCE Sale closing. See Note 16. Prior to being transferred to Ameresco, the interest rate swap was in an asset position valued at $0.2 million. As of September 30, 2023, the interest rate swap has no impact on our Condensed Consolidated Balance Sheets. Credit Risk and Credit Related Contingent Features We are exposed to losses in the event of nonperformance or nonpayment by counterparties and have risk management contracts with many counterparties. As of September 30, 2023, we have one counterparty for which our exposure represents approximately 29% of Pinnacle West’s $15 million of risk management assets. This exposure relates to a master agreement with the counterparty, and the counterparty is rated as investment grade. Our risk management process assesses and monitors the financial exposure of all counterparties. Despite the fact that the great majority of our trading counterparties’ debt is rated as investment grade by the credit rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for a given period. Counterparties in the portfolio consist principally of financial institutions, major energy companies, municipalities and local distribution companies. We maintain credit policies that we believe minimize overall credit risk to within acceptable limits. Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. To manage credit risk, we employ collateral requirements and standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties. Certain of our energy derivative instrument contracts contain credit-risk-related contingent features including, among other things, investment grade credit rating provisions, credit-related cross-default provisions, and adequate assurance provisions. Adequate assurance provisions allow a counterparty with reasonable grounds for uncertainty to demand additional collateral based on subjective events and/or conditions. For those derivative instruments in a net liability position, with investment grade credit contingencies, the counterparties could demand additional collateral if our debt credit rating were to fall below investment grade (below BBB- for Standard & Poor’s or Fitch or Baa3 for Moody’s). The following table provides information about our energy derivative instruments that have credit-risk-related contingent features (dollars in thousands):
| September 30, 2023
Aggregate fair value of derivative instruments in a net liability position | $ | 62,579 |
Additional cash collateral in the event credit-risk-related contingent features were fully triggered (a) | 47,355 |
(a)This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the derivative details above. We have energy-related non-derivative instrument contracts with investment grade credit-related contingent features, which could require us to post additional collateral of approximately $161 million if our debt credit ratings were to fall below investment grade.

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration